M&As and Corporate India

The Economic Times, February 01, 2008

The ultimate test of how the new M&A regulations are applied will depend upon the quality, knowledge and skills of people who man the new authority, and that is where the crux lies, says Pradeep S. Mehta

Business has been up in arms on the merger provisions of the new Competition Act, 2002 (amended in 2007) not just now, but ever since it was being debated. Now, it is not only the long period of a mandatory review, but how they will be applied, and by persons, who may just be under skilled and over zealous.

Their fears are well founded, but crying wolf can only complicate matters. We need to understand the new law in its full splendour, before coming to the conclusion that it will become a millstone around the necks of business. Other than promoting consumer interest, the law can actually promote business welfare too.

The objectives of the new law are to promote economic development of the country and to do so by dealing with market failures, advancing consumer interest and ensuring the freedom of trade for other participants in markets in India.

Its intent is clearly to promote economic democracy so that all players are able to function without any hurdles. The new piece of legislation is a behavioural law and not a structural one, as its predecessor, the Monopolies and Restrictive Trade Practices Act, 1969 (MRTPA) is.

A policy shift, in fact, came about after we adopted reforms in 1991. The MRTPA was amended to delete the merger regulation, so that Indian firms could grow and become global players. Big is no longer bad, but if the big misbehaves then it is bad.

Most of such anti-competitive cases will be in the area of cartelisation (e.g., the cement cartel) and abuse of dominance (such as Monsanto’s steep pricing of their patented Bt cotton seeds). These are the two major challenges for the new competition regime.

Other than cartels and abuse of dominance, one cannot ignore the fact that mergers and acquisitions (M&As) also need to be regulated so that they do not end up in a potentially abusive position. That’s the reason the law has provided for approval of mergers over certain high thresholds prior to their consummation.

The competition authority can also enquire into and order a division of a dominant undertaking, but that is always a difficult task, like unscrambling an omlette. Hence we do need a merger regulation, but one which will follow a ‘rule of reason’ (application of economic analyses included) rather than the ‘rule of law’ (pure legal) approach.

Of the 106 competition laws in the world, nearly all have merger regulations. Most of them require mandatory notification, while very few provide for voluntary notification. Our new law is no different. The main problem is the long period of 210 days or seven months for review.

Most laws, including in China, provide for a period of one to three months for the authority to decide an application. Thus, the Competition Act, 2002 had provided for 90 working days (or approximately 120 calendar days) for review, and on a voluntary basis.

The Parliamentary Standing Committee, where the Amendment Bill was debated, proposed that merger notifications should be mandatory. This was done in the Bill sent to the Lok Sabha on March 6, 2006. There was no discussion on extending the period at all. How the period of 210 calendar days crept into the final Amendment Act remains a mystery. The Bill was adopted as an Act without any debate whatsoever in either the Lok Sabha or the Rajya Sabha.

Merger reviews in all jurisdictions are qualified too, i.e., simple mergers will need to be cleared within thirty days while complex cases will need to be decided within three months. The outliers are Germany and Venezuela which provide for four months, while France and Spain have longer periods.

However, the extended periods are to allow the authority to deal with complex cases, which require deeper analyses. Even the European Commission, which has powers to review mergers, which cuts across more than one member state, is allowed only a maximum period of 90 days.

Records show that globally around 10-15% of the merger applications take more than thirty days. The new Indian authority has also tried to explain that they will follow a similar method by adopting suitable regulations. Perhaps business is not ready to buy it, and thus are asking for deferment of the merger provisions.

Considering the control-freak nature of a large number of our civil servants, who would be manning the new authority, the business fears are valid and well-founded. The fears get compounded by the fact that new M&A regulations will dampen the buoyant economy in India, where restructuring activities through the M&A route are high.

In 2006, the total number of M&A deals, including investments by private equity funds in more than a thousand Indian firms, stood at US$68.3 billion. In fact, M&A transactions with a potential of competition concerns usually involve horizontal mergers, i.e., mergers between two firms in the same business or vertical mergers in the value chain, i.e., a distributor being taken over by a manufacturer or vice versa.

Speaking about business welfare outcomes of good merger regulations, it is important to see that strategic mergers can lead to absolute dominance and its potential for consequent abuse is high. Thus smaller players in the same sector can be threatened and consumer interest can suffer.

In many jurisdictions, mergers are often allowed by conditional approvals. This could mean merging parties are required to give undertakings to not disturb existing arrangements which can discomfort other players or even divest specific product lines. For example, in Europe and South Africa pharmaceutical mergers have been allowed after they divested a particular product line, where the merged company would have a highly dominant market share.

The ultimate test of how the new M&A regulations are applied will depend upon the quality, knowledge and skills of people who man the new authority, and that is where the crux lies. However, the 210 days period for review of M&As needs to be revised to 90 days, to the comfort of the industry, so that the whole law does not get into a logjam again.

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